Leakage, Welfare, and Cost-Effectiveness of Carbon Policy
NBER WORKING PAPER SERIES LEAKAGE, WELFARE, AND COST-EFFECTIVENESS OF CARBON POLICY Kathy Baylis Don Fullerton Daniel H. Karney Working Paper 18898 http://www.nber.org/papers/w18898 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 March 2013 We are grateful for suggestions from Jared Carbone, Brian Copeland, Sam Kortum, Ian Sue Wing, Niven Winchester, and participants at the AEA presentation in San Diego, January 2013. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Kathy Baylis, Don Fullerton, and Daniel H. Karney. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Leakage, Welfare, and Cost-Effectiveness of Carbon Policy Kathy Baylis, Don Fullerton, and Daniel H. Karney NBER Working Paper No. 18898 March 2013 JEL No. Q27,Q28,Q56,Q58 ABSTRACT We extend the model of Fullerton, Karney, and Baylis (2012 working paper) to explore cost-effectiveness of unilateral climate policy in the presence of leakage. We ignore the welfare gain from reducing greenhouse gas emissions and focus on the welfare cost of the emissions tax or permit scheme. Whereas that prior paper solves for changes in emissions quantities and finds that leakage may be negative, we show here that all cases with negative leakage in that model are cases where a unilateral carbon tax results in a welfare loss.
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